Arjuna’s Eye. RBI Governor vows commitment to 4% inflation target amid food price shocks

The Reserve Bank of India Governor Shaktikanta Das on Tuesday reaffirmed the central bank’s unwavering commitment to achieving a 4 per cent inflation target, despite the recurring incidents of food price shocks.

Delivering the Delhi School of Economics (DSE) Diamond Jubilee Distinguished Lecture on ‘Art of monetary policy making: The Indian Context”, Das further underlined the RBI’s vigilant stance against secondary effects of food price shocks and its dedication to preserving price stability through timely actions. 

While no specific timeline for achieving the 4 per cent inflation goal was mentioned, Das acknowledged the risk these recurrent food price shocks posed to anchoring inflation expectations. “We will remain watchful of this also,” Das added.

He also highlighted the government’s ongoing efforts to mitigate the severity and duration of such shocks through timely supply-side interventions. 

FIT framework

It’s worth noting that headline inflation had temporarily eased to 4.8 per cent in June 2023 from a peak of 7.8 per cent in April 2022 but surged to 7.4 per cent in July, primarily due to rising vegetable prices. India officially adopted the flexible inflation targeting (FIT) framework in 2016, aligning itself with global trends. This framework revolves around a legislatively mandated numerical inflation target as the foundation for overall macroeconomic stability. Under FIT, the central bank is mandated by the government to maintain inflation at 4 per cent with a margin of 2 percentage points on either side.

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Das highlighted that the current episode of high global inflation and the preceding overlapping shocks of the pandemic and the Russia-Ukraine war have raised significant issues and challenges for the conduct of monetary policy. 

He said that FIT framework and the target of 4 per cent was put to test, given the multiple challenges faced by the economy due to the pandemic. 

“So when the inflation target was to be reviewed in early 2021 and notified for the next 5 years, the Reserve Bank reiterated and recommended for retention of the 4 per cent target22. It was stressed that the target and the flexibility built around it had helped us to support the economy when required and shift gears and re-prioritise inflation over growth if inflation became high and breached the upper tolerance level of 6 per cent. 

In fact, this is precisely what happened when there was a sudden surge in inflationary pressures following the war in Ukraine. The pursuit of FIT demonstrated our commitment to price stability and enhanced the credibility of monetary policy”.

Liquidity management

Das also said that liquidity management by the Reserve Bank overall has been nimble-footed and agile while responding to evolving circumstances.

Das observed that experience in recent years shows that supply shocks have become more frequent with profound implications for inflation management and anchoring of inflation expectations. A key risk of sustained high inflation is that it can de-anchor inflation expectations., he said.

It is, therefore, important to remain vigilant and take necessary steps in a calibrated and timely manner to keep expectations firmly anchored, Das added.

“The Reserve Bank has been quick and calibrated while navigating through such turbulences. We look though fleeting shocks but remain prepared to undertake policy responses if such shocks show signs of persistence and getting generalised. In such a scenario, monetary policy has to focus on containing the second round effects,” he said.

On financial stability, Das said the RBI has adopted a prudent approach and taken a number of initiatives to revamp regulation and supervision of banks, NBFCs and other financial entities by developing an integrated and harmonised architecture. “Our banking system remains resilient and healthy with improved capital ratios, asset quality and profitability,” he said.